M&A Fundamentals

Question 1

Merger

Answer 1

Two or more companies (usually similar in size) combine to form a new entity
ex. Asda and Sainsbury’s merger

Question 2

Acquisiion

Answer 2

One bigger company buys another smaller company (target)

Target becomes subsidiary (if majority shares) or wholly-owned subsidiary (all the shares)

Question 3

What is the difference between mergers and acquisitions?

Answer 3

Merger - two companies unite (one of the companies ceases to exist after becoming absorbed by the other)
Acquisition - one company obtains a majority stake in the target firm, which retains its name and legal structure

Question 4

Joint Venture

Answer 4

Business arrangement in which 2+ parties agree to pool their resources for the purpose of accomplishing a specific task (e.g. new project or business activity)

Each participant is responsible for profits, losses, and costs associated with it but the venture is its own entity

Question 5

Joint Venture Agreement

Answer 5

Document which sets out all of the partners’ rights and obligations (objectives, initial partner contributions, day-to-day operations, right to the profits/responsibility for losses)

Question 6

Synergy

Answer 6

Concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts

Question 7

Factors attributing to synergy merger

Answer 7

1. Combined talent and technology
2. Revenye enhancements - more sales if combined; better share distribution (cross-selling in different geo markets)
3. Cost reduction - economies of scale, cutting duplicate resources

Question 8

Reasons why a company would acquire another company

Answer 8

1. Synergies - increase supply-chain pricing power (=vertical integration)
2. Speed to market - faster than organic growth, international reach, new product
3. Competition - merge to gain competitive advantage or acquire before competition does
4. New identity or brand - Goodwill
5. Improve performance - buying cheap/undervalued distressed company
6. Skills & technologies - cost of developing new technology & research into medical sicovering
7. People (=acqui-hire)

Question 9

Challenges of merging with another company

Answer 9

1. Integration issues
   - reason why swiss reins more popular with law firms as become partners on branding without full financial integration
2. Overvaluing synergies
   - company pays premium for the target company to find out it paid more than it is worth

60-70% mergers destroy shareholder value

Question 10

Share purchase

Answer 10

Buyer acquires the company by purchasing its shares - negotiate directlu with shareholders or through management (they are the party to transaction)

Question 11

Assest purchase

Answer 11

Buying particular assests and liabilities over a company (seller continues with the remainder) - negotiate directly with the seller, whoever is running the day-to-day operations of the target

Question 12

The pros & cons of share purchase

Answer 12

+
Minimal disruption to the company
Assets and liabilities transfer automatically, incl. contracts, goodwill, IP etc.

-
Acquire unwanted assets/liabilities, unprofitable businesses, debts
Unknwon liabilities - can carve out during acquisition agreement
Change of control clause in loan agreement that can be discovered during DD (consent from the lender?)

Question 13

The pros & cons of asset purchase

Answer 13

+
Only assume assets and liabilities that you want
Lower risk of hidden liabilities

-
Seller may need consent from 3rd parties to transfer contracts (DD look), possible provisins that if assets transfered need for consent - suplier can use this to renegotiate/exit contract
More complicated/time consuming to transfer some assets

Question 14

Three ways a company can raise finance for an acquisition

Answer 14

1. Debt finance
2. Equity finance
3. Pay for the acquisition in shares

Question 15

Debt Finance

Answer 15

Raising money through borrowing money

• issuing of bonds
• receiving a loan from a bank

Question 16

Equity Finance

Answer 16

Raising money by issuing shares

• IPO
• Issue shares to its existing shareholders, offering greater ownership in the company, in return for money

Question 17

IPO

Answer 17

process by which a company issues its shares for the first time

Question 18

Why would a company choose to issue shares to finance an acquisition?

Answer 18

It does not have to pay investors back the moeny raised, even if the company becomes insolvent
No interesst payments which would otherwise reduce cash flow after acquisition
BUT losing some ownership and coontrol of the target company

Question 19

Why would a company choose to borrow to finance an acquisition?

Answer 19

Does not have to give up ownership fo the company

BUT bank maytake security over the acquirer’ss assets (or target) to protect itself from non-payment

Question 20

When would a seller prefer to be paid in shares instead of cash?

Answer 20

If S is confident in the acquisition as it means he will gain equity in a valuable company that it expects to grow

• e.g. WhatsApp shareholders & FB acquisition
• tax benefits

Question 21

When would a buyer prefer pay in cash?

Answer 21

If the buyer is confident in the acquisition and believes the shares are going to increase in value, as result of synergies
+ the seller will usually prefer to be paid in cash as the money
-> shares represent a risk as if synergies fail to materialise, the value of the share may fall